Are Digital Agencies and Vendors the Real Victims of Extended Payment Terms?

New Study Shows Big Brands Taking 65 Days on Average to Pay Digital Agencies

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While big marketers such as Procter & Gamble, Mondelez and Anheuser-Busch InBev have announced longer payment terms for agencies, adland's been divided over whether it's really a business problem. Now there's some evidence that smaller independent agencies, digital shops and vendors are the ones most likely to wait longer than the standard 30 days.

When the 4A's conducted a survey of its membership last month on the topic of payment terms, nearly 100 prominent agencies responded -- with the majority reporting they were paid by clients within a month's time. Some in the industry hailed the news as a victory over clients' attempts to defer payments and the Financial Times even published a story quoting several major ad holding firm CEOs brushing off the issue.

But given it's only been a matter of months since some large international marketers first stated that they'd be pushing payments to four months or more, could the issue really be over?

According to a new study by FastPay focused on the small digital agency and ad-tech landscape, "net 60 is the new norm." The results may need to be taken with a grain of salt; FastPay provides loans to small and mid-sized digital media companies based on their accounts receivable.

Still, the company said its research shows that on average, digital agencies are waiting 65 days to be paid by big brands. The data comes from 340 invoices paid to digital agencies directly by brands. The problem further extends to other sorts of vendors, FastPay said, with data from a sample of 1,145 invoices showing that the time it takes for an ad-tech company to get paid is 72 days on average. (For its report, the company analyzed invoice data collected between January 2010 and December 2012, from 288 companies that contracted direct response agencies, digital agencies and ad-tech companies, among other vendors. The sample consisted of 2,509 invoices with an average value per invoice of $28,518).

"I don't think 60 days, whether its agreed upon or not, is anything earth shattering," said Kamran Asghar, CEO of indie media shop Crossmedia. This suggests that, while big agencies might not be used to two-month long waits, smaller ones see those timeframes as the norm.

Some clients have tried to stretch payment terms further, Mr. Asghar said, and in those cases his agency has had to turn down the business. "There's a trend to put the risk back onto the agencies," he said. "As long as there's competition in the marketplace and a landgrab between holding companies, there's always someone who will consider the risk."

The IAB, through its CFO Council, continues to investigate the issue. Patrick Dolan, exec-VP and chief operating officer at the trade group for interactive ad companies, said: "The IAB CFO Council is looking to bench mark the current state of the industry to help inform our members where they stack up against the industry."

Members' "biggest complaint" with regard to wait times has to do with "reducing the number of discrepancies" in the agencies' and publishers' ad delivery measurement systems, Mr. Dolan said. "When an invoice is discrepant it can take over a month to resolve, thus hold up payment. The IAB and the 4A's have been working on this issue for years through the e-biz initiative."

Michael Lebowitz, CEO of digital agency Big Spaceship, said his shop has yet to have a major issue with payment terms, but a few of his clients have gotten creative with the contracts. "We have a couple of clients with long payment terms of 90-plus [days] but then they give themselves a discount if they pay within 30. That's their policy. It's non-negotiable." One client always paid late so "it didn't matter," while another client always paid quickly and gave itself the discount.

It's not ideal but doable and offset by clients who pay electronically in 30 days, he explained. Big Spaceship avoids real risk, but smaller agencies with less leverage might find themselves in situations where "there's a ton of margin pressure to the point where, if you're in a moment where you need to increase your utilization, you may have to take on [the business]," he said. "I understand there's a major separation between the direct clients for an agency and procurement purchasing on the business side. What I'd like to see is a little bit of a closer alignment."

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